The Performance of Multi-Factor Term Structure Models for Pricing and Hedging Caps and Swaptions

In this paper we empirically compare different term structure models when it comes to the pricing and hedging of caps and swaptions.We analyze the influence of the number of factors on the pricing and hedging results, and investigate which type of data -interest rate data or derivative price data- should be used to estimate the model parameters to obtain the best pricing and hedging results. We use data on interest rates, and cap and swaption prices from 1995 to 1999.We find that models with two or three factors imply better out-of-sample predictions of cap and swaption prices than one-factor models.Also, estimation on the basis of derivative prices leads to more accurate out-of-sample prediction of cap and swaption prices than estimation on the basis of interest rate data.The empirical results on the hedging of caps and swaptions show that, if the number of hedge instruments is equal to the number of factors, the multi-factor models outperform one-factor models in hedging caps and swaptions. However, if one uses a large set of hedge instruments, one-factor models perform as well as multi-factor models.term structure of interest rates;option pricing;hedging;derivatives

Pricing Liquidity Risk with Heterogeneous Investment Horizons

We develop an asset pricing model with stochastic transaction costs and investors with heterogeneous horizons. Depending on their horizon, investors hold different sets of assets in equilibrium. This generates segmentation and spillover effects for expected returns, where the liquidity (risk) premium of illiquid assets is determined by investor horizons and the correlation between liquid and illiquid asset returns. We estimate our model for the cross-section of U.S. stock returns and find that it generates a good fit, mainly due to a combination of a substantial expected liquidity premium and segmentation effects, while the liquidity risk premium is small

Climate research Netherlands : research highlights

In the Netherlands the temperature has risen, on average, by 1.6°C since 1900. Regional climate scenarios for the 21st century developed by the Dutch Royal Meteorological Institute [1] show that temperature in the Netherlands will continue to rise and mild winters and hot summers will become more common. On average winters will become wetter and extreme precipitation amounts will increase. The intensity of extreme rain showers in summer will increase and the sea level will continue to rise. Changing climate will affect all segments and sectors of the society and the economy of the Netherlands, but it also brings new opportunities for major innovation

The hydrological response of the Ourthe catchment to climate change as modelled by the HBV model

The Meuse is an important river in Western Europe, which is almost exclusively rain-fed. Projected changes in precipitation characteristics due to climate change, therefore, are expected to have a considerable effect on the hydrological regime of the river Meuse. We focus on an important tributary of the Meuse, the Ourthe, measuring about 1600 km2. The well-known hydrological model HBV is forced with three high-resolution (0.088°) regional climate scenarios, each based on one of three different IPCC CO2 emission scenarios: A1B, A2 and B1. To represent the current climate, a reference model run at the same resolution is used. Prior to running the hydrological model, the biases in the climate model output are investigated and corrected for. Different approaches to correct the distributed climate model output using single-site observations are compared. Correcting the spatially averaged temperature and precipitation is found to give the best results, but still large differences exist between observations and simulations. The bias corrected data are then used to force HBV. Results indicate a small increase in overall discharge, especially for the B1 scenario during the beginning of the 21st century. Towards the end of the century, all scenarios show a decrease in summer discharge, partially because of the diminished buffering effect by the snow pack, and an increased discharge in winter. It should be stressed, however, that we used results from only one GCM (the only one available at such a high resolution). It would be interesting to repeat the analysis with multiple model

Optical response of highly granular YBaCuO films prepared by non-vacuum aerosol deposition

Highly granular YBaCuO films on SrTiO3 substrates with Tc,o~90K and Jc > 104 A/cm2 were prepared by non-vacuum aerosol deposition. The optical response for these films was investigated on a 10 × 10 μm2 microbridge. Besides a bolometric response around the transition temperature, a sharp response peak was observed at low temperature and high bias current using a He-Ne laser (0.63 μm wavelength) illumination. This response was caused by a junction behaviour due to the presence of many boundary-type weak links in our microbridge

Microwave-induced nonequilibrium temperature in a suspended carbon nanotube

Antenna-coupled suspended single carbon nanotubes exposed to 108 GHz microwave radiation are shown to be selectively heated with respect to their metal contacts. This leads to an increase in the conductance as well as to the development of a power-dependent DC voltage. The increased conductance stems from the temperature dependence of tunneling into a one-dimensional electron system. The DC voltage is interpreted as a thermovoltage, due to the increased temperature of the electron liquid compared to the equilibrium temperature in the leads